Sunday, January 10, 2010

Fannie Mae Guidelines-Part 3

This post concludes a series regarding 2009 changes to Fannie Mae lending guidelines that impact lender review of association master insurance policies. This third impact area is the most ambiguous as the guidelines published to-date do not specify what Fannie Mae considers acceptable.

Lenders will be looking for building ordinance coverage contained within an association's master insurance policy. With regard to building ordinance coverage there are three parts - A, B and C; lenders will interested in part C. To provide a brief background the concept of property insurance is to rebuild a dwelling the way it was when it was originally built. A problem comes into play when times goes by and the city or county passes new building codes to improve energy efficiency or fire safety; examples would include higher insulation requirements, more fire resistant roofing materials or more energy efficient windows. The dwelling coverage contained within an association master policy is not designated to pay for these changes to building code; building ordinance coverage C is meant to cover these costs. Building ordinance coverage C usually comes standard with a minimum amount of around $5,000 and can be increased to fit circumstances. Usually the older a building is the more building ordinance coverage C is needed; for example a 100-unit complex that is 25-years old may require $1.5 million or more in coverage to comply with building code changes that have been mandated since the original build date. Taking this example,if a complex had a need for $1.5 million in building ordinance coverage C but only had $5,000 in actual coverage you can see there is a major financial gap that would have to be made up with special loss assessments imposed on all unit owners. To circumvent this special loss assessment scenario, lenders will be looking for adequate amounts of building ordinance coverage before approving a loan to someone who wishes to purchase a unit.

One building code requirement that can really ramp-up costs are interior fire sprinkler systems; some cities/counties now require them for all new condo/town home complexes with more than four units. This fire sprinkler systems can add $15,000 or more (per unit) to rebuild costs.

Property managers and HOA board members would be prudent to review association master policies for building ordinance coverage C limits to avoid unnecessary delays in funding of loans for prospective incoming buyers. If you have an inadequate amount of building ordinance coverage C; it will cost more to bring it in-line with where it needs to be. Work with your insurance agent/carrier to determine the correct amount of coverage. Just to give you some scale of the issue; 8 of 10 association master policies we review have INADEQUATE amounts of building ordinance coverage C!


  1. Thanks HOA ! I am visiting your blog from long time and seriously getting very good things to know about insurance.. This is just awesome.

  2. HOA Guy, I just lost a sale after 6 months of working it due to the Condo Association not having Building Ordinance or Law Endorsement. The Board met and I had submitted the new information for them to vote on acquiring this type of insurance, but their Insurance Agent told them it wasn't necessary. The buyer had to walk.